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Australia's IAG profit hit by natural disasters, says on track

Posted On: Feb. 23, 2012 12:00 AM CST

SYDNEY (Reuters)—Insurance Australia Group Ltd.'s first-half profit fell 11% after a run of natural disasters pushed up reinsurance costs, but the country's top car and home insurer still beat market forecasts and said it would meet is full-year guidance.

IAG, which dominates the Australian market along with QBE Insurance Group Ltd. and Suncorp Group Ltd., saw unprecedented claims in 2011 from floods and storms in Australia and earthquakes in New Zealand, forcing it to increase reinsurance cover by $600 million Australian to $4.7 billion Australian ($638.2 million to $5 billion).

"The first six months of the 2012 financial year have again been challenging for the insurance industry, with high net natural peril claim costs, including floods in Thailand and the severe Christmas Day storm in Melbourne, significantly increased reinsurance costs and volatile investment markets," IAG CEO and managing director Mike Wilkins said in a statement on Thursday.

IAG's first half-net profit was $144 million Australian ($153.2 million), down from $161 million Australian ($171.3 million) a year ago but topping average forecasts of $119 million Australian ($126.6 million) according to Thomson Reuters I/B/E/S.

General insurance profit fell 42% to $271 million Australian ($288.3 million).

"It was a strong result across the board, obviously impacted by natural perils above expectations but offset by strong reserve releases and strong underlying performance of the business," said Mark Nathan, portfolio manager Arnhem Investment Management.

"The storms and earthquakes and flooding were pretty well flagged, it was well known. What was a pleasant surprise was the improvement in the performance of the U.K., the improvement in New Zealand and strong volume growth in the Australian motor business," he added.

IAG shares rose more than 9% in early deals after the results announcement, transforming the stock from one that had lost ground this year to one that was roughly matching the broader market's gain of nearly 6%.

IAG, which will pay an interim dividend of 5 cents per share, said it expected to report an insurance margin towards the lower end of original guidance of 10% to 12%.

Australian insurers were among the worst hit in 2011, a year which saw global disaster losses of more than $100 billion, and look set to struggle to keep a lid on reinsurance costs.

Last month, the insurer forecast reinsurance expenses of $700 million Australian to $720 million Australian ($744.6 million to $765.9 million) for the 2012 financial year, up from $620 million Australian ($659.5 million) in the previous year.

IAG's first-half natural-peril claims were $130 million Australian ($138.3 million) more than its allowance due to claims from a hailstorm in the state of Victoria on Christmas Day and floods in Thailand.

IAG said its U.K. operations were almost breaking even, a sharp improvement from a year ago when they were dragging on profits.

"In the U.K., we're almost at breakeven as the actions we have taken to reshape our book and improve underwriting and claims disciplines deliver growing benefits," said Mr. Wilkins.

The insurer said it was making progress in boosting its profile in Asia and said its proposal to expand its Malaysian joint venture, AmG, was ongoing. IAG is also waiting for approval for a planned purchase of New Zealand's AMI Insurance.